Although we all hear the horror stories of families racking up five-figure credit card debt, it isn’t always the high-dollar debts or multi-card conundrums that drag us down. For example, Katie had only a single credit card with a $500 limit, but when she fell behind on the payments, late fees and interest charges turned that into $1,200 worth of debt.
By the time Katie paid off her debt, her missed payments had taken a toll on her credit scores, dropping them to around 550 — firmly in the “bad credit” range. Dismayed, it wasn’t until her bank offered her a secured credit card that Katie realized there was a way to rebuild her credit.
Secured by a cash deposit that resides in a protected savings account, secured credit cards can be a lifeline to those who would otherwise be rejected for new credit. No matter what your credit looks like, you can likely find a secured card to start rebuilding.
“No Annual Fee” Secured Cards for Bad Credit
Often, one of the worst things about having poor credit is that interest rates tend to skyrocket around you and fees start following you like a clowder of stray cats. This is typically because low credit scores equate to a high credit risk to lenders and credit card issuers, so they offset some of that risk by charging more for, well, just about everything.
Secured credit cards, on the other hand, present significantly less risk than their unsecured counterparts, so creditors can charge less for these products. For many with bad credit, secured credit cards are one of the only ways to obtain low interest rates and reasonable annual fees. In fact, the annual fees on our favorite secured cards are so low they’re non-existent.
While the deposit is necessary to open your secured credit card account, don’t think that deposit will simply disappear. Your initial deposit — and any additional deposits you make over time — will reside in a protected savings account, accruing modest interest, until one of three scenarios take place.
First, and the most ideal for many, is if your secured card is upgraded to an unsecured credit card by your issuer, and your deposit (and any applicable earned interest) would be returned to you. Many secured cards will automatically review your account after 12 to 18 months, upgrading your card if you’ve shown significant credit improvement.
The second case is if you close your account yourself, at which time the deposit will be returned to you, and that’s that. The third, and least desirable, scenario, is if you stop making credit card payments, and the issuer is forced to close your account. At this point, the issuer will use your deposit to cover your outstanding debt and any applicable fees.
“No Credit Check” Secured Cards for Bad Credit
If you’re living with bad credit, the words “credit check” can be more spine-tingling than having a black cat cross your path — and not just because hard credit inquiries can damage your credit score. No, when you’ve already experienced the nightmare of being rejected for credit due to your scary report, then credit checks can be ghastly.
Another benefit of the lower risk of secured credit cards is that issuers, in addition to charging less for the products, can also loosen their credit restrictions. Indeed, some of our expert picks for secured credit cards have such generous credit requirements that they won’t even check your credit at all — including the card below. Simply fill out an application, make your deposit, and get rebuilding.
The credit line you’ll have available for your secured card will depend on the amount you deposit, and a larger deposit will mean a higher credit limit. In most cases, your credit limit will be equal to 90% to 100% of your deposit. Although it may be difficult to put down a large deposit at first, many secured cards will allow you to add to your deposit over time.
It’s typically a good idea to put down a fairly significant deposit, as a larger credit limit can not only be more convenient, but it can also improve your credit utilization rate by increasing your available credit. Since credit utilization can be worth up to 30% of your credit score, boosting your limit can be beneficial to rebuilding your score.
“No Minimum Score” Secured Cards for Bad Credit
In the secured credit card world, thankfully, even those cards that do check your credit generally won’t judge you for it. Most secured card issuers will overlook bad credit of all types, including that bankruptcy discharge that creeps behind you like a horror-movie villain. And if you don’t have any credit history yet, they’ll help you build one.
As an extra perk, many secured credit cards will also offer you interest rates that don’t feel like highway robbery. Of course, you should avoid carrying a balance if possible, but if you know you’re likely to, you should choose a card that makes it affordable to do so. Take the top-rated secured cards below; here you have options for APRs as low as 9.99%, depending on the size of the annual fee you’re comfortable paying.
One important thing to keep in mind when exploring secured credit cards, particularly if your intent is to build (or rebuild) credit, is that your new card must report to at least one — but, preferably, all three — of the major consumer credit bureaus — Equifax, Experian, and TransUnion.
The credit bureaus don’t actively seek out information; creditors and lenders need to report it to the bureaus for it to show up on your report. Without regular reports on your payment behaviors from your creditors, the credit bureaus won’t have any idea whether you’ve been making your payments as agreed.
Since the whole point of your credit report is to show future creditors that you can handle credit, any product that fails to report that information won’t help you build a positive credit history. (Incidentally, this is why prepaid cards don’t help — or hurt — your credit score.)
Build — or Rebuild — Credit with the Right Secured Card
With the help of a good secured credit card, almost anyone can find a way to rebuild their credit score. In Katie’s case, a year of responsibly using her secured credit card improved her credit score enough that her bank upgraded her secured card to an unsecured card, returning her deposit in the process. Her new unsecured credit card had a whopping $2,000 credit limit, likely boosting her score even more through a lower utilization rate.
For those, like Katie, who are fighting poor credit scores and bad financial habits, a secured credit card can help spark light at the end of the tunnel — but only when used responsibly. Remember to always, always pay your bills before the due date to avoid both late fees and credit damage, as well as maintaining low balances so your utilization rate stays low, too.
Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.